(Answer: All of them.)

We once heard this cute and to the point riddle at a valuation seminar. Recognizing the valuation issues in ownership methods is critical in valuations. The fact is that tenants in common (TIC) interests in real property are generally subject to substantial valuation discounts. This can be particularly helpful in estate cases. The tax courts have held that TIC interests should be afforded several discounts. In LeFrak v Commissioner of Internal Revenue (T.C. Memo 1993 526), the U.S. Tax Court held that a TIC interest warranted both a lack of marketability discount and a minority interest discount.

The degree which valuation discounts can be taken on TIC interest is directly associated with the related risks in this form of ownership. The consideration of these risks should be fully exploited in a valuation case. 

Lack of Control 

• The reality of the TIC form of ownership is that the smallest minority owner has the same rights to the use of the property and decision making as a majority owner. Consider the difficulties when ownership rests in 10 or more equal owners.

Partitioning Risks

• There are mixed opinions on whether the ability to partition (which creates a mechanism to liquidate a TIC interest) reduces the lack of marketability/liquidity discount, which is normally associated with partial ownership interests in real estate. We believe the valuator must also consider the costs and time delays which ultimately deplete the value of the real estate in resolving multiple owner issues.

Lack of Marketability and Liquidity

• The major limiting factor of a TIC interest is that there is a very limited pool of investors who are interested in TIC ownership. Other significant ancillary issues include the difficulty in pricing and, the lack of an organized exchange that prices or sell such interests.

Potential Family Ownership Risks

• A non-blood relative certainly faces risks as an outsider to a TIC owned property.

The Uncertainty of Co-Owners

• Owners have no control over who their co owners may be and due to the lack of control could be forced to have to reach agreement with a potentially "unfriendly" owner.

The Assumption of Liability

• The risk here is in the joint and several liability co-owners share without having control.

The Lack of Written Agreement

• TIC ownership does not have the structure of a partnership or LLC agreement, articles of incorporation, or other written guidance. These documents typically describe how decisions which affect the real estate are made and how voting rights, if any, work within their ownership structure. The lack of documentation causes a degree of uncertainty to a person considering purchase of a TIC interest.

We consider a TIC interest a prime candidate for substantial valuation discounts which can save significant estate and gift tax.